Tuesday, September 04, 2012

Brad DeLong – "Hopeless Unemployment" in the 1930s & today

As Jonathan Chait and others have have correctly insisted, one of the most important questions to ask about current American politics and political economy is why Washington accepts mass unemployment—or, at the very least, has conspicuously failed to treat persistent high unemployment as an urgent and compelling priority. Here's how Chait put in on August 3:

In the years since the collapse of 2008, the existence of mass unemployment has stopped being something the economic powers that be even pretend to regard as a crisis. To those directly impacted, the economic crisis is an emergency, a life-altering disaster the damage from which will endure for years. But most of those in a position to address it simply have not seen it in such terms. History will record that the economic elite has viewed the economic crisis from a perspective of detached complacency.

Two events from the last week have underscored this disturbing reality. The most widely covered was the Federal Reserve’s announcement that, despite a weakening economy, it still would not take steps to stimulate growth. The Fed may not like mass unemployment, but it dislikes inflation even more, and in its calculus, the hypothetical prospect of the latter outweighs the immediate reality of the former. [....]

There are signs we’ve hit bottom[paraphrasing a line from a Washington Post editorial]. Nothing to worry about here. Why risk the possibility of a small outlay merely to provide relief to hundreds of thousands of desperate people? This is such a perfect statement of the way the American elite has approached the economic crisis. They concede that it is a problem. But there are other problems, you know.

It’s important to respond to arguments on intellectual terms and not merely to analyze their motives. Yet it is impossible to understand these positions without putting them in socioeconomic context. Here are a few salient facts: The political scientist Larry Bartels has found (and measured) that members of Congress respond much more strongly to the preferences of their affluent constituents than their poor ones. And for affluent people, there is essentially no recession. Unemployment for workers with a bachelors degree is 4 percent — boom times. Unemployment is also unusually low in the Washington, D.C., area, owing to our economy’s reliance on federal spending, which has not had to impose the punishing austerity of so many state and local governments.

I live in a Washington neighborhood almost entirely filled with college-educated professionals, and it occurred to me not long ago that, when my children grow up, they’ll have no personal memory of having lived through the greatest economic crisis in eighty years. It is more akin to a famine in Africa. For millions and millions of Americans, the economic crisis is the worst event of their lives. They have lost jobs, homes, health insurance, opportunities for their children, seen their skills deteriorate, and lost their sense of self-worth. But from the perspective of those in a position to alleviate their suffering, the crisis is merely a sad and distant tragedy.

When Chait speaks of "the economic elite" in the first paragraph above, the formulation is a bit misleading, since what he has primarily in mind are the political elites and public institutions responsible for economic policy (though, of course, their priorities are influenced by the fact that the "economic elite" in a more precise sense has also been largely unconcerned about the unemployed). And it is certainly true that they have treated the problem of mass unemployment with a remarkable degree of complacency. This assessment would have to include not only the Federal Reserve but the dominant tendencies in the US Congress and in both major political parties, as well as the main body of conventional wisdom in the punditry and the commentariat. Instead, most discussion has tended to focus obsessively on controlling the federal deficit, which is a real but long-term problem, while downplaying or simply ignoring the more urgent short-term problems of stimulating recovery from the Great Recession and reducing persistently high levels of unemployment.

A similar charge can be leveled, with slightly more qualifications, against the Obama White House. In 2009 the Obama administration and the Congressional Democrats did take actions that successfully prevented the Great Recession from plunging over the edge into another Great Depression, and in the process prevented unemployment from spiking even higher than it has. But in 2010 the Obama administration also let itself get distracted into a premature focus on the deficit, and in 2010 & 2011 deficit-related polemics tended to drown out everything else in Washington. In a September 2011 address to a joint session of Congress, Obama did propose a serious, though insufficiently ambitious, set of measures to promote economic recovery and reduce unemployment (the American Jobs Act). But his plan faced predictable and monolithic Republican opposition and went nowhere; and now everyone (not only Republican presidential candidates) seems to be trying to pretend that he never offered a jobs plan at all.

Of course, in their campaign rhetoric Republicans do bemoan the continuing high levels of unemployment as part of their indictment of the Obama administration, and at the just-completed Republican convention the human costs of unemployment figured in a number of speeches. But these crocodile tears about unemployment have to rank as some of the most blatantly hypocritical features of a generally hypocritical and dishonest propaganda exercise. In practice, since the beginning of 2009 the Republicans have consistently blocked measures that would have promoted economic recovery and reduced unemployment, and in fact have actively pushed contractionary fiscal and monetary policies, while doing everything they could to grandstand about the federal deficit (and imaginary threats of inflation) and to shift attention away from the more urgent problem of unemployment. And they've been remarkably successful in helping to move the focus of political conversation in that direction. But the Democrats and the commentariat share some of the blame.

=> For several years now, Brad DeLong has been one of the people trying to figure out the explanation for this astounding degree of complacency and inaction in the face of persistently high levels of long-term unemployment (for a quick sketch of some possible contributing factors, see here). But however one explains these distorted priorities, and the intellectual and political failures underlying them, the crucial point is that the failure to seriously address the problem of unemployment has been and remains dramatically unwise, harmful, and reprehensible.

Not long ago DeLong explained some of the reasons why in a compact but illuminating piece (below) comparing the phenomenon of "hopeless unemployment" in the Great Depression of the 1930s and today's Great Recession. I would say there are four key lessons to take away from this piece. First, long-term mass unemployment has dramatic human, social, and economic costs, so that trying to reduce it should be treated as an urgent priority. Second, if we take seriously the lessons learned since the 1930s, it should be clear that there are tools available for a country like the US to address the problem of mass unemployment effectively, if the political will is there. Third, to a remarkable extent, many of those hard-won lessons seem to have been forgotten (for some elaboration, see here), and the political will to address the problem is not there. Fourth, if that situation doesn't change soon, then this failure will have long-term consequences that we will all come to regret.

BERKELEY – However bad you think the global economy is today in terms of the business cycle, that is only one lens through which to view the world. In terms of global life expectancy, total world wealth, the overall level of technology, growth prospects in emerging economies, and global income distribution, things look rather good, while on still other dimensions – say, global warming or domestic income inequality and its effects on countries’ social solidarity – they look bad.

Even on the business-cycle dimension, conditions have been far worse in the past than they are today. Consider the Great Depression and the implications of market economies’ inability back then to recover on their own, owing to the burden of long-term unemployment.

But, while we are not at that point today, the Great Depression is no less relevant for us, because it is increasingly likely that long-term unemployment will become a similar impediment to recovery within the next two years.

At its nadir in the winter of 1933, the Great Depression was a form of collective insanity. Workers were idle because firms would not hire them; firms would not hire them because they saw no market for their output; and there was no market for output because workers had no incomes to spend.

By that point, a great deal of unemployment had become long-term unemployment, which had two consequences. First, the burden of economic dislocation was borne unequally. Because consumer prices fell faster than wages, the welfare of those who remained employed rose in the Great Depression. Overwhelmingly, those who became and remained unemployed suffered the most.

Second, reintegrating the unemployed even into a smoothly functioning market economy would prove to be very difficult. After all, how many employers would not prefer a fresh entrant into the labor force to someone who has been out of work for years? The simple fact that an economy had recently undergone a period of mass unemployment made it difficult to recover levels of growth and employment that are often attained as a matter of course.

Devalued exchange rates, moderate government budget deficits, and the passage of time all appeared to be equally ineffective remedies. Highly centralized and unionized labor markets, like Australia’s, did as poorly as decentralized and laissez-faire labor markets, like that of the United States, in dealing with long-term unemployment. Fascist solutions were equally unsuccessful, as in Italy, unless accompanied by rapid rearmament, as in Germany.

In the end, in the US, it was the approach of World War II and the associated demand for military goods that led private-sector employers to hire the long-term unemployed at wages they would accept. But, even today, economists can provide no clear explanation of why the private sector could not find ways to employ the long-term unemployed in the near-decade from the winter of 1933 to full war mobilization. The extent of persistent unemployment, despite different labor-market structures and national institutions, suggests that theories that pinpoint one key failure should be taken with a grain of salt.

At first, the long-term unemployed in the Great Depression searched eagerly and diligently for alternative sources of work. But, after six months or so passed without successful reemployment, they tended to become discouraged and distraught. After 12 months of continuous unemployment, the typical unemployed worker still searched for a job, but in a desultory fashion, without much hope. And, after two years of unemployment, the worker, accurately expecting to be at the end of every hiring queue, had lost hope and, for all practical purposes, left the labor market.

This was the pattern of the long-term unemployed in the Great Depression. It was also the pattern of the long-term unemployed in Western Europe at the end of the 1980s. And, in a year or two, it will be the pattern again for the long-term unemployed in the North Atlantic region.

I have been arguing for four years that our business-cycle problems call for more aggressively expansionary monetary and fiscal policies, and that our biggest problems would quickly melt away were such policies to be adopted. That is still true. But, over the next two years, barring a sudden and unexpected interruption of current trends, it will become less true.

The current balance of probabilities is that two years from now, the North Atlantic’s principal labor-market failures will not be demand-side market failures that could be easily remedied by more aggressive policies to boost economic activity and employment. Rather, they will be structural market failures of participation that are not amenable to any straightforward and easily implemented cure.

About Me

Jeff Weintraub is a social & political theorist, political sociologist, and democratic socialist who has been teaching most recently at the University of Pennsylvania, Bryn Mawr College, and the New School for Social Research, He was a Visiting Scholar at the Center for European Studies at Harvard University in 2015-2016 and a Research Associate at the Graduate School of Social Work and Social Research, Bryn Mawr College.
(Also an Affiliated Professor with the University of Haifa in Israel & an opponent of academic blacklists.)